InspireMyCapital.com | “Cash Slow” vs. Cash Flow: Thinking Outside the Neighborhood Box
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Cash Slow

12 Feb “Cash Slow” vs. Cash Flow: Thinking Outside the Neighborhood Box

Have you ever thought about purchasing investment property in your own neighborhood?

When most investors think about adding real estate to their financial portfolio, they commonly turn to their local market first because they feel most comfortable and knowledgeable close to home. They want to purchase an investment property within a short drive that they can physically touch and feel connected to. This is certainly understandable and can provide peace of mind to many investors. “Invest in what you know” is what we were always told.

There’s a real and profound misconception, however, that investing close to home translates into a smarter, more secure real estate investment or that it will meet one’s investment objectives.  What if the real estate metrics in your neighborhood do not satisfy your investment needs?  What if investments outside of your neighborhood yield far greater returns than your neighborhood or the surrounding area could possibly produce?

The truth is that while there may be investment opportunities in every market, every market is unique and may or may not suit the needs of every investor.  Oftentimes they have to think outside of their neighborhood box to realize their investment objectives.

Sound scary?  Well here’s one simple question to ask yourself before making any real estate investment decisions:

Do I want “Cash Slow” or Cash Flow?

The larger coastal cities (e.g. LA, NY, Miami) are all about investing for appreciation (aka Cash Slow).  They tend to be the highest appreciation markets in the country where many investors have doubled, tripled, even received ten-fold on their investment simply by holding real estate over time as land and property values have increased. At the same time, these markets also tend to experience big peaks and valleys in real estate prices which puts a premium on timing the market when buying or selling. And despite being the most sought after rental areas (vacancy rates < 3%), these markets have some of the lowest cap rates in the country (aka no cash flow). They are not very attractive for those seeking steady streams of income, but may be ideal for investors committed to a long-term hold who can wait for the possibility of a big future payout.

On the flip side, many markets in the South and Midwest (particularly the “Rustbelt” areas) are all about Cash Flow.  They provide some of the best cash flowing markets (“mailbox money”) in the country where investors can typically earn more than double or triple the annual return on their real estate investments vs. the coastal markets. For example, it is not uncommon to purchase a residential property for $50K in Cleveland, OH and receive $800/mo. in rent. Compare this to buying a property in Los Angeles for $400K and getting $1700/mo. in rent. The difference in returns is staggering. But unlike the coastal markets, appreciation in the South and Midwest is small and slow as real estate prices tend to remain fairly steady. These markets are ideal for investors seeking a more secure, stable investment that produces a steady stream of income or for those seeking to accumulate income-producing properties.

Does this mean purchasing investment property in your hometown is unwise?

No, certainly not. Everyone has different investment objectives and it depends on where you live, your risk/reward level, and marrying the importance of financial returns vs. your peace of mind. As Kevin O’Leary (aka “Mr. Wonderful” from NBC’s investment show Shark Tank) likes to say, “All I want is to wake up richer in the morning than when I go to sleep”.  And for some investors, owning real estate close to home is the only way they’d sleep well at night — regardless of the financial returns.

Is it possible to achieve “cash slow” and cash flow in the same investment?

Certainly, but market timing, real estate expertise, and your need for investment liquidity play a large role in selecting the right investment.  Unless you find a steal of a deal in a cash slow neighborhood, realizing cash flow on this same property will always be difficult.

But what if I put more money down in a cash slow neighborhood so the property actually cash flows?

Believe it not, I get this question all the time — even from seasoned investors.  These are typically number crunchers who will do anything to make the numbers work.  For instance, they’ll put 60% down on a property vs. 30% just to see positive cash flow every month.  They don’t seem to realize that they are losing the return on the extra 30% down payment and/or the opportunity costs to purchase another property with the additional 30% and increased leverage.

So which type of investor are you?  Before you jump on the next deal that comes up in your neighborhood, make sure you understand the financial metrics of your neighborhood (cash slow or cash flow) and whether it fits into your investment objectives.  There are MANY ways to earn a safe, secure and attractive return on real estate, but it must fit within your investment needs or you likely won’t sleep at night.

Hopefully, this article inspired you to think different about investments in real estate. If you’d like help or want to discuss how best to use this information to inspire your next investment, please feel free to contact us at 626.788.9700 or click here.